Share allotment: PNB Housing Finance erred in pricing, says Sebi

Regulator says allotment of shares did not conform to the company's articles of association

The Securities and Exchange Board of India (Sebi) on Friday told the Securities Appellate Tribunal (SAT) that the board of directors of PNB Housing Finance (PNB HF) had erred in approving the pricing for the preferential allotment of shares because it did not conform to the company’s articles of association (AoA).

The market watchdog was also critical of the valuation report furnished by the company, and said that it had merely indulged in a mathematical calculation of the floor price, without spelling out the valuation methodologies used to arrive at the price, which typically is the case when such an exercise is conducted by independent registered valuers.

PNB HF had told the appellate tribunal it had carried out a valuation exercise that was certified by two accounting firms.

“The approval of the board of directors has consequences in law and Sebi is entitled to step in at this stage. If you place a particular pricing before shareholders during the extraordinary general meeting (EGM) please do it by your own articles of association. There is no repugnancy between the ICDR (Issue of Capital and Disclosure Requirements) and AoA provisions and Section 19 (2) of the AoA is operative, which makes the board resolution deficient,” legal counsel representing Sebi argued before the tribunal. He added article 19(2) of the AoA, which requires valuation by an independent registered valuer, was brought in at the time of the company’s listing.

The extraordinary general meeting on June 22 was called to decide on a special resolution on the preferential allotment of shares to the Carlyle Group and other investors.

It required the approval of 75 per cent of those present and voting to pass. The parties to the deal were Punjab National Bank, the largest shareholder, and private equity firms Carlyle, General Atlantic, and Ares SSG, which together own 85 per cent in PNB Housing Finance.

The SAT admitted there was no repugnancy between section 19 (2) of the company’s AoA and the ICDR, which prescribes a minimum floor price for the preferential allotment but does not prohibit higher pricing.

Sebi alleged the valuation report furnished by the company merely certified the floor price arrived at under the ICDR, and did not spell out the valuation methodologies used to arrive at the price, which typically is the case when such an exercise is conducted by independent registered valuers.

It further said that rule 13(1) of the Companies (Share Capital and Debentures) Rules, 2014, was only an enabling provision and should not be availed of if the company’s AoA said otherwise.

The regulator also refuted the company's allegations that its second letter dated June 25 was a breach of natural justice. It said the report of the stock exchanges and the issues raised by Sebi were placed before the company and it was given ample time to respond. An absence of personal hearing did not invalidate the regulator’s actions, Sebi said. 

The SAT will hear the matter on Monday for arguments and rejoinder.

PNB Housing Finance had told the SAT on Monday that the regulator could not compel it to follow the AoA because it was just a contract.

The preferential allotment was announced by PNB Housing in May. It was deemed “unfair” to public shareholders by proxy advisory firm SES. On June 18, Sebi directed the company to halt the allotment unless an independent valuer did the valuation.

The mortgage lender then moved the SAT.